Corporates love debt and often obtain loans from a mix of different banks and (especially in recent years) non-bank lenders. While levels of multiple lender loans fluctuate, anecdotal evidence (meaning the response we get when we ask our friends at law firms and at banks and non-bank lenders) indicates that there has been an increase over the past ten years in multi-lender loans, especially from a combination of bank and non-bank lenders.
With multiple lenders comes the complexity of brokering an agreement between the lenders so that they each know what their rights and obligations are with respect to the other lenders. The key issues to be resolved include:
- how and when each lender will get repaid;
- whether and in what circumstances a lender can enforce any security interests granted in its favour by the borrower; and
- what a lender can do with any proceeds received from enforcement.
Depending on the lending arrangements, the outcome of these negotiations will be documented in one of three forms:
- Priority Deed: A document to change or regulate the ranking of security interests granted by a borrower to its lenders, where those security interests secure the same collateral.
- Subordination Deed: A document to change or regulate an arrangement between lenders that are owed debts by a common borrower, under which one lender agrees to defer payment of its debt in favour of the debt of another lender(s).
- Intercreditor Deed: A document that combines both a Priority Deed and a Subordination Deed, used when lenders want to change or regulate the ranking of security interests granted in their favour by a borrower and regulate the debts owed to them by a common borrower in the one document.
As former banking lawyers themselves, the banking and finance team at Practical Law Australia know all too well how difficult, time consuming, and frustrating it is for lawyers and their clients to try and negotiate and settle these intercreditor documents, especially when each lender and their lawyers has its own precedent.
To help streamline the documentation process, the Practical Law banking and finance team is pleased to announce the release of a set of intercreditor documents for use in both secured and unsecured loan transactions. These documents have been carefully drafted to be clear, concise, and balanced. Each document also has several optional clauses that allow for typical negotiating points: for example, the Priority Deed and the Intercreditor Deed each contain optional wording allowing the parties to agree on a cap on the amount that can be retained by each lender in an enforcement scenario, or to allow a junior lender to have certain limited enforcement rights ahead of a senior lender when there has been a default by the borrower.
The Priority Deed, the Subordination Deed, and the Intercreditor Deed, and our practice notes that delve more deeply into the nature and nuances of intercreditor documents and negotiations, are available to our subscribers in the "Subordination, priority and intercreditor" section of the Practical Law Australia Banking and Finance practice area.
For more information on these documents or to request a trial subscription to Practical Law Australia, please contact head writer Alex Chernishev at email@example.com.